After UN vote and exit of Chapter VII, Citi group bolsters Iraqi bonds

20 Jul 2013

Citi Group Inc. has decided to open its business in Iraq. It has to be noted that after easing of UN sanctions dating back to the Saddam Hussein era are driving yields on the OPEC oil producer’s bonds down from a four-year high, Iraq has become a popular place for the investors.

Yields on the Middle Eastern nation’s $2.7 billion security due January 2028 slid 137 basis points to 7.43 percent in the eight days from June 24 after Citigroup became the first U.S. lender to venture into Iraq since Hussein was toppled a decade ago. That compares with a 39 basis-point drop to 5.19 percent in the HSBC/Nasdaq Dubai Middle East Conventional Sovereign US Dollar Bond Index in the period. Iraq’s bonds yielded 7.4 percent at 4:20 p.m. today in Baghdad.

Citigroup, JPMorgan Chase & Co. and Standard Chartered Plc (STAN) have shown their interests to expand their banking operations in the country of Iraq, which is presently marked as the second largest oil producer of OPEC, the oil agency. The UN Security Council added to investor confidence by voting on June 27 to remove the threat of military enforcement on the issues of Kuwaiti people, property and archives missing since Iraq invaded the country in 1990.

Sanjay Motwani, president of Singapore-based Sansar Capital Management LLC, stated that Citigroup’s announcement “had an impact because it meant that big banks are going into Iraq.”

It has to be noted that Sansar Capital Management LLC manages a fund with $30 million invested in Iraqi equities. Sanjay Motwani further added, “The risk premium for Iraq sharply dropped after June 24, mainly in anticipation of the UN decision to ease the sanctions, which was eventually adopted June 27.”

The Oil Output of Iraq

It has been estimated by the world’s oil experts that Iraq possesses the fifth largest proven oil reserve and the country is boosting its oil sector through infrastructural development, leading to greater oil output which is aiding the country financially. Recently, the country has hit the bull’s eye, by registering a record of oil products which is the highest in last two decades. Exxon Mobil Corp, OAO Lukoil (LKOH) and other companies helped boost production by 24 percent in 2012. The government is increasing spending by 18 percent this year to $118 billion, and the International Monetary Fund forecasts an annual economic growth rate of 9 percent, the fastest after Libya among 18 countries in the region.

The spread between Iraqi sovereign bonds and U.S. Treasuries, which peaked this year at 653 on June 25, has narrowed since then by 127 basis points, or 1.27 percentage points, JPMorgan Chase’s EMBIG Sovereign Spread Iraq index shows. The spread was 506 basis points a few days ago. A Strong Performer “In a global context, Iraq has been a strong performer,” Gabriel Sterne, a London-based economist at Exotix Holdings Ltd. whose research includes 40 frontier-market sovereigns, said in a July 16 e-mail. “There is the usual trade-off between political risk and strong revenues that investors have to weigh up. So I think the bonds are roughly fairly valued.” There are some activities that intended to undermine the development within the nation. Car bombing and some other terrorist activities are clearly probing that. The yield on Iraq’s bonds gained 20 basis points after July 2 amid a wave of deadly violence. At least 337 people have been killed in attacks across the nation so far this month, the Associated Press reported, citing police and local officials.

Internal political turmoil is also there in the country. Prominently the oil dispute between Baghdad and semi-autonomous Kurdistan region is harming the country’s democratic political framework, as well as the unity as a nation! Street protests by minority Sunni Muslims, worsening relations with Turkey and the civil war in neighboring Syria contribute to tensions in the country.

The UN Vote

The UN Security Council boosted Iraq’s prospects when it agreed that the issue of missing Kuwaiti citizens and disagreements over Kuwaiti archives and property should be resolved peacefully, under Chapter 6 of the UN Charter. The council kept the constraints pertaining to an arms embargo and war reparations under Chapter 7, which allows the use of force. 5 percent of its oil revenue has to be disbursed as compensation for Kuwait by Iraq. The compensation is due to the war related damages that had taken place in Kuwait. $11 billion it owes by 2015, Iraqi Foreign Minister Hoshyar Zebari said June 12.

“The fact that some sanctions under Chapter 7 have been lifted means that it will be easier for international banks to trade and have a relationship with local Iraqi banks,” Sansar’s Motwani said.

Foreign banks were barred from the nation until after the U.S.-led invasion ousted Hussein’s government. Today, 15 international banks operate in the country of 33 million people. They compete with seven state banks, 23 private lenders and nine Islamic banks, according to the central bank’s website.

Listing of AsiaCell

The listing of Asiacell has been regarded as the biggest success of Iraq in recent times. The country’s stock exchange attracted investors in the February listing of Asiacell Communications PJSC, which raised $1.3 billion in the Middle East’s biggest initial public offering since 2008.

Citigroup plans to open representative offices and branches in Baghdad and the cities of Basra and Erbil to benefit from an estimated $1 trillion of infrastructure spending, Mayank Malik, the U.S. bank’s chief executive officer for Jordan, Iraq, Syria and the Palestinian territories, said in a June 27 interview. The lender is also among international banks seeking to finance a pipeline to export Iraqi oil and natural gas through Jordan.

Standard Chartered plans to open branches this year in Baghdad and Erbil, followed by a third office in Basra, a southern oil hub, in 2014. JPMorgan Chase signed a one-year agreement on July 6 to help the Trade Bank of Iraq finance imports of goods and services, John Gibbons, managing director and EMEA regional executive for the New York-based bank, said in a July 7 interview.

“Foreign banks entering Iraq are mainly there for trade finance, as companies from their respective countries need financial tools and services to do business in Iraq,” Abdul-Aziz Hassoun, executive director of the League of Private Banks, an Iraqi business group, said by phone on July 17.

“Iraq is a promising market because of the rising oil revenue and infrastructure projects which have helped boost the level of trade finance on an annual basis,” he said.